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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2003 Commission file number: 0-28152
Affinity Technology Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 57-0991269
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Affinity Technology Group, Inc.
1053 B Sparkleberry Lane Extension
Columbia, SC 29223
(Address of principal executive offices)
(Zip code)
(803) 758-2511
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ____ No X
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
41,864,485 shares of Common Stock, $0.0001 par value, as of November 1, 2003.
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2003 and
December 31, 2002................................................................... 3
Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 2003 and 2002................................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2003 and 2002......................................................... 5
Notes to Condensed Consolidated Financial Statements.................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 10
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk........................... 14
ITEM 4. Controls and Procedures............................................................. 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................... 15
ITEM 2. Changes in Securities and Use of Proceeds........................................... 15
ITEM 6. Exhibits and Reports on Form 8-K.................................................... 16
Signature........................................................................................ 16
2
Part I. Financial Information
Item 1. Financial Statements
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30,
2003 December 31,
(Unaudited) 2002
-----------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 10,372 $ 156,780
Receivables - 5,666
Other current assets 24,121 42,784
-----------------------------------------------
Total current assets 34,493 205,230
Property and equipment, net 15,872 27,600
Other assets 1,365 2,018
-----------------------------------------------
Total assets $ 51,730 $ 234,848
===============================================
Liabilities and stockholder's deficiency
Current liabilities:
Accounts payable $ 74,462 $ 20,741
Accrued expenses 326,179 242,001
Convertible notes 830,336 -
Current portion of deferred revenue 17,647 25,000
-----------------------------------------------
Total current liabilities 1,248,624 287,742
Convertible notes 225,000 830,336
Deferred revenue 19,118 25,000
Commitments and contingent liabilities Stockholders' deficiency:
Common stock, par value $0.0001; authorized 60,000,000 shares, issued
43,622,697 and 43,049,363 shares at
September 30, 2003 and December 31, 2002, respectively 4,362 4,305
Additional paid-in capital 70,498,292 70,441,149
Common stock warrants 52,000 52,000
Treasury Stock, at cost (2,168,008 shares at September
30, 2003 and December 31, 2002) (3,505,287) (3,505,287)
Accumulated deficit (68,490,379) (67,900,397)
-----------------------------------------------
Total stockholders' deficiency (1,441,012) (908,230)
-----------------------------------------------
Total liabilities and stockholder's deficiency $ 51,730 $ 234,848
===============================================
See accompanying notes.
3
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
----------------------------------- ----------------------------------
Revenues:
Transactions $ - $ 10,486 $ - $ 104,849
Patent license revenue 4,411 - 13,235 -
Other income - 36,921 - 51,111
----------------------------------- ----------------------------------
Total revenue 4,411 47,407 13,235 155,960
Costs and expenses:
Cost of revenues 442 1,707 1,324 14,319
Selling, general and administrative expenses 140,020 262,445 543,686 1,092,731
----------------------------------- ----------------------------------
Total cost and expenses 140,462 264,152 545,010 1,107,050
----------------------------------- ----------------------------------
Operating loss (136,051) (216,745) (531,775) (951,090)
Interest income 32 996 530 996
Interest expense (20,768) (18,857) (58,737) (53,728)
----------------------------------- ----------------------------------
Net loss $ (156,787) $ (234,606) $ (589,982) $ (1,003,822)
=================================== ==================================
Net loss per share - basic and diluted: $ (0.00) $ (0.01) $ (0.01) $ (0.02)
=================================== ==================================
Shares used in computing net loss per share 41,454,689 40,881,355 41,404,921 40,648,388
=================================== ==================================
See accompanying notes.
4
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2003 2002
-------------------------------------------
Operating activities
Net loss $ (589,982) $ (1,003,822)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 12,381 115,210
Provision for doubtful accounts - 9,000
Inventory valuation allowance - 45,000
Deferred revenue (13,235) -
Other 17,385 63,986
Changes in current assets and liabilities:
Accounts receivable 5,666 431,603
Other current assets 18,663 60,597
Accounts payable and accrued expenses 137,899 (80,724)
-------------------------------------------
Net cash used in operating activities (411,223) (359,150)
Investing activities
Sale (purchases) of property and equipment, net 39,815 (4,044)
-------------------------------------------
Net cash provided by (used in) investing activities 39,815 (4,044)
Financing activities
Proceeds from convertible notes 225,000 625,000
Payments on notes payable - (38,737)
-------------------------------------------
Net cash provided by financing activities 225,000 586,263
-------------------------------------------
Net (decrease) increase in cash (146,408) 223,069
Cash and cash equivalents at beginning of period 156,780 27,720
-------------------------------------------
Cash and cash equivalents at end of period $ 10,372 $ 250,789
===========================================
Supplemental cash flow information:
Income taxes paid $ - $ -
===========================================
Interest paid $ - $ -
===========================================
See accompanying notes.
5
Notes to Condensed Consolidated Financial Statements
1. Going Concern
To date, Affinity Technology Group, Inc. (the "Company") has generated
substantial operating losses, has experienced an extremely lengthy sales cycle
for its products and services and has been required to use a substantial amount
of cash resources to fund its operations. The Company does not believe that
existing cash and other anticipated funds will be sufficient to fund its
operations through February 2004. In addition, principal and accrued interest of
$120,725 under the convertible notes issued by the Company in June 2002 will
become due in June 2004. Accordingly, to remain viable the Company must raise
additional capital and generate revenue and working capital through its patent
licensing business, which is in its inception stage. If the Company is unable to
raise additional capital and generate working capital through the sale of patent
licenses very soon, it will be forced to consider alternatives for winding down
its business, which may include filing for bankruptcy protection. To maintain
the minimal resources necessary to support its current operations and execute a
patent licensing strategy, the Company does not believe that substantial
additional reductions in its operating expenses are feasible. No assurances can
be given that the Company will be able to raise additional capital or generate
working capital from its patent licensing business in a manner that would allow
it to continue its operations.
The Company is attempting to secure additional working capital to continue
its business activities. Such action may include the placement of additional
debt and/or equity securities.
There is substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or amounts and classification of liabilities that may result from this
uncertainty. However, management believes that any adjustments to reflect the
possible future effects on the recoverability and classification of assets and
amounts and classification of liabilities would not be material to the Company's
financial position.
2. Basis of Presentation
The accompanying unaudited financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The balance sheet at December 31, 2002 has been derived
from the audited consolidated financial statements at that date, but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal, recurring accruals) which, in the
opinion of management, are necessary for a fair presentation of the results for
the periods shown. The results of operations for such periods are not
necessarily indicative of the results expected for the full year or for any
future period. The accompanying financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
for the year ended December 31, 2002.
In accordance with management's oversight of the Company's operations, the
Company conducts its business in one industry segment - financial services
technology (see Note 7).
Certain amounts in 2002 have been reclassified to conform to 2003
presentation for comparability. These reclassifications have no effect on
previously reported stockholders' equity or net loss.
3. New Accounting Standards
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure - an
6
Amendment of FASB Statement No. 123" ("SFAS No. 148"). SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require in both annual and
interim financial statements prominent disclosures about the method of
accounting for stock based employee compensation and the effect of the method
used on reported results. The Company is required to follow the prescribed
disclosure format and has provided the additional disclosures required by SFAS
No. 148 for the quarterly period ended September 30, 2003 (see Note 4).
On January 1, 2003, the Company adopted Financial Accounting Standards
Board No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143").
SFAS No. 143 provides guidance on the recognition and measurement of an asset
retirement obligation and its associated retirement cost. It also provides
accounting guidance for legal obligations associated with the retirement of
tangible long-lived assets. The adoption of SFAS No. 143 did not materially
impact the Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities and Interpretation of ARB No. 51" ("Fin 46"). Many
variable interest entities have been commonly referred to as special-purpose
entities or off-balance sheet structures, but this interpretation applies to a
larger population of entities. In general, a variable interest entity ("VIE") is
any legal structure used for business purposes that either: (1) does not have
equity investors with voting rights, or (2) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
Under Fin 46, the VIE is required to be consolidated by the Company if the
Company is subject to a majority of the risk of loss from the VIE's activities
or entitled to receive a majority of the entity's residual returns. The
consolidation requirements of FIN 46 apply to VIEs created after January 31,
2003 and apply to existing VIEs in the first year or interim period beginning
after June 15, 2003. The Company has adopted FIN 46, and it did not have a
material impact on the Company's consolidated financial statements.
In April 2003, the Financial Accounting Standards Board issued Statement
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS No. 149"). This statement amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133. SFAS No. 149
improves financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, this statement (1)
clarifies under what circumstances a contract with an initial net investment
meets the characteristics of a derivative as defined by SFAS No. 133, (2)
clarifies when a derivative contains a financing component, (3) amends the
definition of an underlying to conform it to the language used in FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others", and (4)
amends certain other existing pronouncements. Those changes will result in more
consistent reporting of contracts as either derivatives or hybrid instruments.
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003, and it did not have a material impact on the Company's consolidated
financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" ("SFAS No. 150"). This statement establishes
standards for how an issuer classifies and measures in its financial position
certain financial instruments with characteristics of both liabilities and
equity. In accordance with this standard, financial instruments that embody
obligations for the issuer are required to be classified as liabilities. SFAS
No. 150 is effective for all financial instruments entered into on or modified
after May 31, 2003. For existing financial instruments, SFAS No. 150 is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company adopted SFAS No. 150 and there was no material impact on its
financial position, results of operations or cash flows from adoption.
In November 2002, the Financial Accounting Standards Board's Emerging
Issues Task Force ("EITF") reached a final consensus on Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables", which is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. Under EITF Issue No. 00-21, revenue arrangements with
multiple deliverables are required to be divided into separate units of
accounting under certain circumstances. The Company adopted EITF Issue No. 00-21
on July 1, 2003, and such
7
adoption did not have a material effect on its condensed consolidated financial
statements for the three and nine months ended September 30, 2003.
4. Stock Based Compensation
The Company accounts for stock options in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, no
compensation expense is recognized for stock or stock options issued at fair
value. For stock options granted at exercise prices below the estimated fair
value, the Company records deferred compensation expense for the difference
between the exercise price of the shares and the estimated fair value. The
deferred compensation expense is amortized ratably over the vesting period of
the individual options. For performance based stock options, the Company records
compensation expense related to these options over the performance period.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("SFAS 123" as amended by FASB Statements No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS
148")), provides an alternative to APB 25 in accounting for stock based
compensation issued to employees. SFAS 123 provides for a fair value based
method of accounting for employee stock options and similar equity instruments.
However, for companies that continue to account for stock based compensation
arrangements under APB 25, SFAS 123 requires disclosure of the pro forma effect
on net income and earnings per share as if the fair value based method
prescribed by SFAS 123 had been applied. The Company intends to continue to
account for stock based compensation arrangements under APB No. 25 and has
adopted the pro forma disclosure requirements of SFAS 123.
Had compensation cost for options granted under the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
consistent with SFAS 123, the Company's net income and earnings per share would
have changed to the pro forma amounts listed below:
Nine Months Ended September 30,
2003 2002
-------------------------------------
Net loss:
As reported $ (589,982) $(1,003,822)
Add: stock-based compensation expense
included in reported net income - -
Deduct: stock-based compensation expense
determined under the fair value based
method for all awards (37,186) (98,862)
-------------------------------------
Pro forma net loss $ (627,168) $(1,102,684)
=====================================
Net loss per common share:
As reported:
Basic and diluted $ (0.01) $ (0.02)
Pro forma:
Basic and diluted $ (0.02) $ (0.03)
The pro forma disclosures required by SFAS 123 regarding net loss and net
loss per share are stated as if the Company had accounted for stock options
using fair values. Compensation expense is recognized on a straight-line basis
over the vesting period of each option installment. Using the Black-Scholes
option-pricing model the fair value at the date of grant for these options was
estimated using the following assumptions:
8
Nine Months Ended September 30,
2003 2002
------------------------------------------
Dividend yield - -
Expected volatility 132% 136%
Risk-free rate of return 1.99% 4.32%
Expected option life, years 3 3
The weighted average fair value for options granted under the Option Plans
during the nine months ended September 30, 2003 and 2002 was $0.14 and $0.07,
respectively.
The Black-Scholes and other option pricing models were developed for use in
estimating fair value of traded options, which have no vesting restrictions and
are fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions. The Company's employee stock options have
characteristics significantly different than those of traded options, and
changes in the subjective assumptions can materially affect the fair value
estimate. Accordingly, in management's opinion, these existing models may not
necessarily provide a reliable single measure of the fair value of employee
stock options.
5. Net Loss Per Share of Common Stock
Net loss per share of Common Stock amounts presented on the face of the
consolidated statements of operations have been computed based on the weighted
average number of shares of Common Stock outstanding in accordance with the
Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Stock
warrants and stock options were not included in the calculation of diluted loss
per share because the Company has experienced operating losses in all periods
presented and, therefore, the effect would be anti-dilutive.
6. Convertible Debenture and Notes
In June 2002, the Company issued convertible secured notes (the "notes") to
certain investors as part of its capital raising initiatives. The principal
amount of notes issued totaled $830,336 and included the issuance of a note in
the principal amount of $205,336 to AMRO International, S.A. ("AMRO") in
satisfaction of the principal and accrued interest outstanding under a
convertible debenture previously issued to AMRO. The notes bear interest at 8%
and principal and accrued interest are due in June 2004. The notes are secured
by the stock of the Company's wholly-owned subsidiary, decisioning.com, Inc.
("decisioning.com"). decisioning.com is the Company's patent licensing
subsidiary and owns the Company's patent portfolio. The notes are convertible
into the Company's common stock at a conversion rate of $.20 per share. The
Company may prepay the notes subject to a prepayment penalty of 8% and 4% if the
prepayment occurs within the first twelve months or thereafter, respectively. In
March 2003, August 2003 and November 2003 the Company issued an additional
$200,000, $25,000 and $150,000, respectively, principal amount of convertible
notes on terms identical to the terms of the notes issued in June 2002, except
that the new notes mature in March 2005, August 2005 and November 2005,
respectively. The notes issued in November 2003 include a $100,000 note acquired
by a subsidiary of The South Financial Group, which owns approximately 12% of
the Company's outstanding capital stock.
On September 22, 2000, the Company entered into a convertible debenture and
warrants purchase agreement with AMRO. The agreement was amended in August 2001
as described below. Under the original agreement on November 22, 2000, the
Company issued to AMRO an 8% convertible debenture in the principal amount of
$1,000,000. The debenture was convertible, at the option of AMRO, into shares of
the Company's common stock at a price equal to the lesser of $1.00 per share or
65% of the average of the three lowest closing prices of the Company's stock
during the month prior to conversion. Under the original agreement, the
debenture matured on May 22, 2002, subject to earlier conversion and certain
provisions regarding acceleration upon default and prepayment. Under the
original agreement, on November 22, 2000, the Company also issued to AMRO a
three-year warrant to acquire 200,000 shares of the Company's common stock. The
warrant exercise price was originally
9
$0.3542 per share. AMRO exercised a portion of the debenture into an aggregate
of 6,214,665 shares of the Company's stock.
In August 2001, the Company and AMRO amended the convertible debenture and
warrants purchase agreement. Under the terms of the amendment, the Company
agreed to repay the debenture in full in a series of monthly payments through
June 2002, and AMRO agreed not to convert the debenture into any additional
shares of the Company's common stock. In addition, the Company agreed to reduce
the exercise price of the warrant issued to AMRO from $0.3542 per share to $0.05
per share, and to reduce the exercise price of a three-year warrant to acquire
720,000 shares issued to the investor under the Company's previous equity line
agreement from $0.8554 per share to $0.05 per share.
In June 2002, the Company issued to AMRO an 8% convertible secured note in
the principal amount of $205,336 in full satisfaction of remaining amounts
outstanding under its convertible debenture. The terms of the 8% convertible
secured notes are discussed above. In October 2003, AMRO converted $74,000
principal amount and accrued interest of $7,959 under its secured convertible
note into an aggregate of 409,796 shares of the Company's common stock. Such
conversion reduced the principal of the convertible secured note issued to AMRO
to $131,336.
7. Segment Information
The Company conducts its business within one industry segment - financial
services technology. To date, all revenues generated have been from transactions
with North American customers. All other segment disclosures required by SFAS
131 are included in the consolidated financial statements or in the notes to the
consolidated financial statements.
8. Commitments and Contingencies
The Company is subject to legal actions which from time to time have arisen
in the ordinary course of business. In addition, a lawsuit has been filed by a
plaintiff who claims certain rights, damages and interests incidental to the
Company's formation and development. The lawsuit initially resulted in a jury
verdict of $68,000 in favor of the plaintiff, and the plaintiff subsequently
requested, and was granted, a new trial. The Company's appeal of the order
granting a new trial was denied in August 2003. Accordingly, there will be a new
trial with respect to this action which the Company expects to occur in January
2004. The plaintiff alleges that the Company breached an agreement to give him a
1% equity interest in the Company for services he claims to have performed in
1993 and 1994. The plaintiff seeks monetary damages of $5,463,000. In the
opinion of management, the Company has meritorious defenses to this claim.
9. Subsequent Events
In November 2003, the Company issued an additional $150,000 principal
amount of its convertible notes. The notes bear interest at 8%, and principal
and accrued interest are due in November 2005.
In October 2003, AMRO International, S.A. converted $74,000 principal
amount and accrued interest of $7,959 under its secured convertible note into an
aggregate of 409,796 shares of the Company's common stock. Such conversion
reduced the principal of the convertible secured note issued to AMRO to
$131,336.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Statements in this report (including Management's Discussion and Analysis
of Financial Condition and Results of Operations) that are not descriptions of
historical facts, such as statements about the Company's future prospects and
cash requirements, are forward-looking statements and are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Actual results may vary due to risks and uncertainties, including the failure by
the Company to raise additional capital or generate revenues in amounts
sufficient to permit it to continue its operations, challenges to the Company's
patents, unanticipated costs and expenses affecting the Company's cash position
and other
10
factors discussed in the Company's filings with the Securities and Exchange
Commission, including the information set forth under the caption "Business
Risks" in Item 1 of the Company's Annual Report on Form 10-K for the year ended
December 31, 2002. These and other factors may cause actual results to differ
materially from those anticipated.
Overview
Affinity Technology Group, Inc. (the "Company") was formed to develop and
market technologies that enable financial institutions and other businesses to
provide consumer financial services electronically with reduced or no human
intervention. Products and services previously offered by the Company include
its DeciSys/RT(R) loan processing system, which automated the processing and
consummation of consumer financial services transactions; the Affinity Automated
Loan Machine (the ALM(R)), which allowed an applicant to apply for and, if
approved, obtain a loan in as little as ten minutes; the Mortgage ALM, which
allowed an applicant to apply for a mortgage loan; e-xpertLender(R), which
permitted a financial institution to make automated lending decisions through
its call centers and branches; iDEAL, which permitted automobile lenders to make
automobile lending decisions for loan applications originated at automobile
dealers; and rtDS, which permitted lenders to deliver credit decisions to
applicants over the Internet. Due to capital constraints, the Company has
suspended all efforts to further develop, market and offer these products and
services. The Company's last processing contract terminated in late 2002, and
the Company has no plans in the near term to engage in further sales or other
activities related to its products or services, other than to license the
patents that it owns. Currently, the Company's business activities consist
exclusively of attempting to enter into license agreements with third parties to
license the Company's rights under its patents.
In conjunction with its product development activities, the Company applied
for and obtained three patents. The Company has been granted two patents
covering its fully-automated loan processing systems (U. S. Patents No.
5,870,721 and 5,940,811). In August 2000, the U.S. Patent and Trademark Office
issued to the Company a patent covering the fully-automated establishment of a
financial account, including credit accounts (U.S. Patent No. 6,105,007). In
addition, in 1997 the Company acquired a patent that covers the automated
processing of an insurance binder through a kiosk (U. S. Patent No. 5,537,315).
Both of the Company's patents covering fully-automated loan processing
systems have been subject to reexamination by the U.S. Patent and Trademark
Office (the "PTO") due to challenges to such patents by third parties. On
January 28, 2003, the Company received a Reexamination Certificate (U. S. Patent
No. 5,870,721 C1) from the PTO which formally concluded the reexamination of U.
S. Patent No. 5,870,721. The reexamination of the Company's other loan
processing patent (U. S. Patent No. 5,940,811) is still ongoing. It is possible
that third parties may bring additional actions to contest all or some of the
Company's patents. The Company can make no assurances that it will not lose all
or some of the claims covered by its existing patents.
To date, the Company has generated substantial operating losses, has
experienced an extremely lengthy sales cycle for its products and services and
has been required to use a substantial amount of cash resources to fund its
operations. The Company does not believe that existing cash and other
anticipated funds will be sufficient to fund its operations through February
2004. In addition, principal and accrued interest of $120,725 under the
convertible notes issued by the Company in June 2002 will become due in June
2004. Accordingly, to remain viable the Company must raise additional capital
and generate revenue and working capital through its patent licensing business,
which is in its inception stage. If the Company is unable to raise additional
capital and generate working capital through the sale of patent licenses very
soon, it will be forced to consider alternatives for winding down its business,
which may include filing for bankruptcy protection. To maintain the minimal
resources necessary to support its current operations and execute a patent
licensing strategy, the Company does not believe that substantial additional
reductions in its operating expenses are feasible. No assurances can be given
that the Company will be able to raise additional capital or generate working
capital from its patent licensing business in a manner that would allow it to
continue its operations.
On May 27, 2003, decisioning.com entered into a legal representation
agreement with Withrow & Terranova, PLLC, pursuant to which decisioning.com
appointed Withrow & Terranova, PLLC as its exclusive representative for the
solicitation and negotiation of agreements to license decisioning.com's patents.
(This
11
arrangement replaced the former patent licensing agent agreement between
decisioning.com and Information Ventures LLC d/b/a LPS Group, which was
terminated on April 30, 2003.) Under the agreement, Withrow & Terranova, PLCC
has agreed to promote, market, solicit, and negotiate the licensing of patents
with third parties and to represent decisioning.com as legal counsel in
connection with any patent litigation associated with the enforcement of the
patents. As compensation for its services under the agreement, Withrow &
Terranova will receive 25% of all revenues received by decisioning.com under any
patent agreements and 25% of all amounts paid in settlement of any patent
litigation commenced by the Company. The term of the agreement is for the life
of the patents, subject to either party's right to terminate the agreement for
"cause," as specified in the agreement, and without cause following the third
anniversary of the agreement. If the agreement is terminated by decisioning.com,
Withrow & Terranova, PLLC will be entitled to continue to receive compensation
attributable to patent agreements negotiated prior to termination and, if such
termination is without cause, compensation for certain future patent agreements.
Critical Accounting Policies
The Company applies certain accounting policies, which are critical in
understanding the Company's results of operations and the information presented
in the consolidated financial statements. We consider critical accounting
policies to be those that require more significant judgments and estimates in
the preparation of our financial statements, the most critical of which pertains
to the valuation reserve on net deferred tax assets. The Company records a
valuation allowance to reduce its deferred tax assets to the amount that it
estimates is more likely than not to be realized. As of September 30, 2003 and
December 31, 2002, the Company recorded a valuation allowance that reduced its
deferred tax assets to equal its deferred tax liability.
Results of Operations
Revenues
The Company recognized revenues of $4,411 and $13,235 from the monthly
amortization of deferred patent license fees for the three and nine months ended
September 30, 2003, respectively. The Company has exited all of its previous
business activities other than the licensing of its patents. The Company's
patent licensing business is in an early stage. Revenues recognized for the
three and nine months ended September 30, 2002, were $47,407 and $155,960,
respectively. Such revenues consisted of transaction fees and other income, as
discussed below.
Transaction fees. Revenues from transaction fees were $10,486 and $104,849
for the three and nine months ended September 30, 2002, respectively, and
consisted of fees charged for services provided pursuant to the Company's final
loan processing contract. Such contract was terminated in October 2002.
Other income. Other income generally consists of miscellaneous revenue
typically associated with ancillary fees that are non-recurring in nature. Other
income recognized for the three and nine months ended September 30, 2002,
respectively, consisted of miscellaneous items associated with the Company's
final loan processing contract.
Costs and Expenses
Cost of Revenues. Cost of revenues for the three and nine months ended
September 30, 2003 was $442 and $1,324, respectively, compared to $1,707 and
$14,319 for the corresponding periods in 2002. The decrease during the three and
nine months ended September 30, 2003 as compared to the same periods in 2002 is
primarily attributable to the Company's withdrawal from its activities as an
application service provider. Cost of revenues incurred during the three and
nine months ended September 30, 2003, were attributable to amortization of
commissions associated with patent licenses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $140,020 and $543,686 for the three and nine
months ended September 30, 2003, as compared to $262,445 and $1,092,731 for the
corresponding periods in 2002. The decrease for the three and nine months ended
September 30, 2003, as compared to the corresponding periods of 2002 is
primarily attributable to a continued decrease in
12
employment and related costs associated with an overall reduction in the number
of employees and reduced overall expense levels.
Interest expense. Interest expense for the three and nine months ended
September 30, 2003, was $20,768 and $58,737, respectively, compared to $18,857
and $53,728 for the corresponding periods in 2002. Interest expense for 2003 is
primarily associated with the issuance of $830,336 principal amount of
convertible notes in June 2002 and $200,000 principal amount of convertible
notes in March 2003. Interest expense recognized in the third quarter and first
nine months of 2002 is attributable to the Company's convertible notes issued in
June 2002 and a convertible debenture formerly held by AMRO. The outstanding
balance of this debenture of $205,336 was satisfied in June 2002 through the
issuance of convertible notes as described below.
Liquidity and Capital Resources
The Company has generated net losses of $68,490,379 since its inception and
has financed its operations primarily through net proceeds from its initial
public offering in May 1996 and cash generated from operations and other
financing transactions. Net proceeds from the Company's initial public offering
were $60,088,516.
To date, the Company has generated substantial operating losses, has
experienced an extremely lengthy sales cycle for its products and services and
has been required to use a substantial amount of cash resources to fund its
operations. The Company does not believe that existing cash and other
anticipated funds will be sufficient to fund its operations through February
2004. In addition, principal and accrued interest of $120,725 under the
convertible notes issued by the Company in June 2002, as discussed below, will
become due in June 2004. Accordingly, to remain viable the Company must raise
additional capital and generate revenue and working capital through its patent
licensing business, which is in its inception stage. If the Company is unable to
raise additional capital and generate working capital through the sale of patent
licenses very soon, it will be forced to consider alternatives for winding down
its business, which may include filing for bankruptcy protection. To maintain
the minimal resources necessary to support its current operations and execute a
patent licensing strategy, the Company does not believe that substantial
additional reductions in its operating expenses are feasible. No assurances can
be given that the Company will be able to raise additional capital or generate
working capital from its patent licensing business in a manner that would allow
it to continue its operations.
In June 2002, the Company issued convertible secured notes (the "notes") to
certain investors as part of its capital raising initiatives. The principal
amount of notes issued totaled $830,336 and included the issuance of a note in
the principal amount of $205,336 to AMRO International, S.A. ("AMRO") in
satisfaction of the principal and accrued interest outstanding under a
convertible debenture previously issued to AMRO. The notes bear interest at 8%
and principal and accrued interest are due in June 2004. The notes are secured
by the stock of the Company's wholly-owned subsidiary, decisioning.com.
decisioning.com is the Company's patent licensing subsidiary and owns the
Company's patent portfolio. The notes are convertible into the Company's common
stock at a conversion rate of $.20 per share. The Company may prepay the notes
subject to a prepayment penalty of 8% and 4% if the prepayment occurs within the
first twelve months or thereafter, respectively. In March 2003, August 2003 and
November 2003 the Company issued an additional $200,000, $25,000 and $150,000
principal amount of its convertible notes on terms identical to the terms of the
notes it issued in June 2002, except that the new notes mature in March 2005,
August 2005 and November 2005, respectively. The notes issued in November 2003
include a $100,000 note acquired by a subsidiary of The South Financial Group,
which owns approximately 12% of the Company's outstanding capital stock.
In the second quarter of 2001, the Company issued a $1 million note to
HomeGold Financial, Inc., which was secured by the stock of its wholly-owned
mortgage subsidiary, Surety Mortgage, Inc. The note matured on December 31,
2001, at which time the Company tendered the stock of Surety in full
satisfaction of outstanding principal and accrued interest under the note in
accordance with the terms of the note. The Company had previously entered into a
contract with HomeGold under which it processed certain mortgage loan
applications originated by HomeGold. Such contract expired on December 31, 2001.
13
In June 2000, the Company entered into an agreement with Redmond Fund, Inc.
("Redmond") under which Redmond acquired, for $500,000, 484,848 shares of the
Company's common stock and a three-year warrant to acquire an additional 484,848
shares for $1.37 per share. The warrant has expired.
On September 22, 2000, the Company entered into a convertible debenture and
warrants purchase agreement with AMRO. The agreement was amended in August 2001
as described below. Under the original agreement on November 22, 2000, the
Company issued to AMRO an 8% convertible debenture in the principal amount of
$1,000,000. The debenture was convertible, at the option of AMRO, into shares of
the Company's common stock at a price equal to the lesser of $1.00 per share or
65% of the average of the three lowest closing prices of the Company's stock
during the month prior to conversion. Under the original agreement, the
debenture matured on May 22, 2002, subject to earlier conversion and certain
provisions regarding acceleration upon default and prepayment. Under the
original agreement on November 22, 2000, the Company also issued to AMRO a
three-year warrant to acquire 200,000 shares of the Company's common stock. The
warrant exercise price was originally $0.3542 per share. AMRO exercised a
portion of the debenture into an aggregate of 6,214,665 shares of the Company's
stock.
In August 2001, the Company and AMRO amended the convertible debenture and
warrants purchase agreement. Under the terms of the amendment, the Company
agreed to repay the debenture in full in a series of monthly payments through
June 2002, and AMRO agreed not to convert the debenture into any additional
shares of the Company's common stock. In addition, the Company agreed to reduce
the exercise price of the warrant issued to AMRO from $0.3542 per share to $0.05
per share, and to reduce the exercise price of a three-year warrant to acquire
720,000 shares issued to the investor under the Company's previous equity line
agreement from $0.8554 per share to $0.05 per share.
In June 2002, the Company issued to AMRO an 8% convertible secured note in
the principal amount of $205,336 in full satisfaction of amounts outstanding
under its convertible debenture. The terms of the 8% convertible secured notes
are discussed above. In October 2003, AMRO converted $74,000 principal amount
and accrued interest of $7,959 under its secured convertible note into an
aggregate of 409,796 shares of the Company's common stock. Such conversion
reduced the principal of the convertible secured note issued to AMRO to
$131,336.
Net cash used during the nine months ended September 30, 2003, to fund
operations was $441,223 compared to $359,150 for the same period in 2002. Net
cash used during the nine months ended September 30, 2002 reflects the
collection of approximately $432,000 of accounts receivable in that period. At
September 30, 2003, cash and liquid investments were $10,372, as compared to
$156,780 at December 31, 2002. At September 30, 2003 working capital was a
deficit of $1,214,131 as compared to a deficit of $82,512 at December 31, 2002.
Such deficit at September 30, 2003 includes approximately $830,000 in
convertible notes which are due in June 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not believe that its current business exposes it to
significant market risk for changes in interest rates.
Item 4. Controls and Procedures
The Company has carried out an evaluation, under the supervision and with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the period covered by this
report. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of September 30, 2003, to provide reasonable
assurances that the information required to be disclosed by the Company in its
reports under the Securities Exchange Act of 1934 was recorded, processed,
summarized and reported within the required time periods.
There have been no changes in the Company's internal controls over
financial reporting that occurred during the Company's most recent fiscal
quarter that materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
14
Part II. Other Information
Item 1. Legal Proceedings
In June 2003, the Company filed a lawsuit against Federated Department
Stores, Inc. and certain of its subsidiaries alleging that Federated has
infringed one of the Company's patent (U.S. Patent No. 6,105,007). In September
2003, the Company filed a similar lawsuit against Ameritrade Holding Corporation
and its subsidiary, Ameritrade, Inc. alleging infringement of the same patent.
Both lawsuits were filed in the United States District Court in Columbia, South
Carolina and both seek unspecified damages.
Since early 2001, the Company and Citibank N.A. have been engaged in a
dispute involving amounts the Company claims it is owed by Citibank under a
contract that the Company and Citibank entered into in 1997 related to the
development of a system to process automobile loans. This contract was
transferred by Citibank to The Dime Savings Bank of New York in connection with
the sale of Citibank's automobile loan business to The Dime Savings Bank. On two
occasions, Citibank has filed a lawsuit in federal court in New York seeking a
declaratory judgment releasing Citibank from any obligation to the Company for
amounts the Company has billed Citibank under the contract. The first such
action was filed by Citibank in March 2001, and such action was dismissed in
January 2002 because the court determined that the parties had not complied with
the dispute resolutions provisions of the contract. The second such action was
filed in May 2002, and such action was subsequently transferred to the United
States District Court in Columbia, South Carolina, on March 11, 2003, for
consolidation with the Company's pending lawsuit against Citibank. On two
occasions, the Company has filed actions in federal court in South Carolina
seeking to collect amounts it believes it is owed from Citibank. The first such
action, filed in July 2001, was dismissed by the court in April 2002 because the
court determined that the parties had not complied with the dispute resolution
provisions of the contract. The second such action was filed in May 2002, and is
pending.
The Company is party to a lawsuit filed by a plaintiff who has alleged
certain rights, damages and interests incidental to the Company's formation and
development. The lawsuit initially filed on November 30, 1996, resulted in a
jury verdict of $68,000 in favor of the plaintiff, and the plaintiff
subsequently requested, and was granted, a new trial. The Company's appeal of
the order granting a new trial was denied in August 2003. Accordingly, there
will be a new trial with respect to this action, which is pending in the Court
of Common Pleas for the County of Richland in Columbia, South Carolina. The
trial is scheduled to occur in January 2004. The plaintiff alleges that the
Company breached an agreement to give him a 1% equity interest in the Company
for services he claims to have performed in 1993 and 1994. The plaintiff seeks
monetary damages of $5,463,000. In the opinion of management, the Company has
meritorious defenses to this claim.
Item 2. Changes in Securities and Use of Proceeds
On August 29, 2003, November 4, 2003 and November 13, 2003 the Company
issued $25,000, $100,000 and $50,000, respectively, principal amount
of its convertible secured notes to a group of accredited investors
for cash in transactions exempt from registration pursuant to Section
4(2) of the Securities Act of 1933. These notes are convertible into
shares of common stock of the Company at a price of $0.20 per share.
On October 7, 2003, the Company issued 409,796 shares of its common
stock upon conversion of principal and interest of $81,959 outstanding
under the Company's convertible notes issued in June 2002. These
shares were issued in a transaction exempt from registration pursuant
to Section 3(a)(9) of the Securities Act of 1933.
Items 3, 4 and 5 are not applicable.
15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
3.1 Certificate of Incorporation of Affinity Technology Group,
Inc., which is hereby incorporated by reference to Exhibit
3.1 to the Registration Statement on Form S-1 of Affinity
Technology Group, Inc. (File No. 333-1170).
3.2 Bylaws of Affinity Technology Group, Inc., which is hereby
incorporated by reference to Exhibit 3.2 to the Registration
Statement on Form S-1 of Affinity Technology Group, Inc.
(File No. 333-1170).
31 Rule 13a-14(a)/15d-14(a) Certification
32 Section 1350 Certification
(b) Reports on Form 8-K
None
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Affinity Technology Group, Inc.
By: /s/ Joseph A. Boyle
-------------------
Joseph A. Boyle
Chairman, President, Chief Executive Officer and Chief Financial Officer
(principal executive and financial officer)
Date: November 14, 2003
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